The Fee Structure And Pricing Of Loan Commitments

Loan Commitment is a contractual agreement to lend to a specific borrower up to a certain amount at given interest rate term. Loan Commitments are widely used in the economy.The price structure may include various fees and interest. It's help to resolve moral hazard and informational asymmetry in loan market, and can reduce investment distortions. Despite the pivotal role of loan commitments in the finance, there is little research on this issue, and the literature on pricing is not extensive. To comprehend loan commitment pricing clearly, I organize this review about theories of loan commitment pricing, and point out the problems in this issue.This article includes 5 sections. The first section describes the features of loan commitment price structure. In Section Two, we introduce a model of loan commitment price design, which can eliminate investment distortions. The third section discusses the pricing of loan commitment. Loan commitment can be evaluated by equilibrium pricing and option pricing approach, and the latter is the main part of this paper. In the part, we utilize Black-Scholes option pricing model to obtain a valuation formula for loan commitments, introducing the pricing models for fixed rate and variable loan commitments. Section Forth analyzes the factors that influence the price of loan commitments, which include MAC clause,takedown risk and bank-client relation. Finally Section 5 is a summary and conclusion.